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CCER讨论稿:Markets Price Politicians:Evidence from China’s Municipal Bond Markets

发布日期:2020-12-02 02:55    来源:
E2020013                                                     2020-12-02
He Wang  Yang Yao  Yue Zhou 
Markets not only allocate resources, but may also punish or reward politicians for economic performance. In this paper, we study China’s municipal bond markets and find that bonds issued by more competent mayors enjoy lower interest rates. Our simultaneous equation estimation finds that mayors’ abilities—measured by their personal contributions to their cities’ economic growth—affect bond prices by pushing the investors’ supply of funds outward. An increase of one standard deviation in a mayor’s ability lowers investors’ asking price by 0.13 percentage point, which amounts to a savings of 42 million yuan during a mayor’s tenure. We also find that ability has stronger impacts in the first year of a mayor’s tenure and on bonds issued by lower-rating issuers or by economically or financially less developed cities. These findings suggest that the market can play a role in promoting good governance.
Keywords: politicians’ ability, municipal bonds, executive constraints
JEL classification: G12, H11, P43